Applied Nutrition Plc (APN) Earnings Call Transcript & Summary

Thank you for joining us. I'm here today to present our first set of results as a plc. Joining me today is our COO, Steven Granite; and our CFO, Joe Pollard. I'm really pleased to announce that we've seen strong growth. We've entered new geographies, new channels. We've seen record numbers on our direct-to-consumer and H2 has started very, very strongly with March being our strongest month ever. Now I appreciate those people listening today who are not familiar with Applied Nutrition and what differentiates us as a health and wellness brand. So I want to give you a brief overview of who we are, what markets we operate in and why we're going to win. Our vision is to become the world's most trusted and innovative health and wellness sports nutrition brand. So a stereotypical view of Applied Nutrition will be that we just sell to gym goers. But we actually sell to a wider range of consumers than just gym goers. We sell from an elite level athlete all the way to just a health-conscious individual who want to make a more healthier choice. We operate in over 85 countries, and we're trading with some of the biggest grocers in the world like Walmart. As you can see from this slide, we're not concentrated in any one area. We have a wide range of offerings that appeal to a wide range of consumers. And as the industries and the categories have evolved over the years, so as our offerings. So over the years, our brand evolved into 4 ranges from our Applied Nutrition core range, which appeals to a wide range of consumers from an elite athlete who needs a batch tested product to health-conscious individuals. Then you have our ABE range, which is very much a performance-led range. Then you've got the BodyFuel range, which is our entry-level range. And then we have our Endurance range, which appeals to the cyclists and the runners of the world. As you can see from the stat at the top, we've broadened our ranges within the period. I'm now going to hand you over to Steven, who's going to talk you through the routes to market and strategic progress.

Okay. Thanks, Tom. We have established and diverse routes to market, which are predominantly B2B driven. You can see in the chart below, the biggest driver of that growth has been retailer relationships and our distributors across the world. They've generated most of the growth that we've had since '21, relationships such as Holland & Barrett, Walmart, Tesco, direct relationships with key retailers globally. In terms of our distributors, how the model works is for international, we will have a chosen partner or in some cases, multiple partners in the country. We will supply the product to them at a cost price. They take care of all the importation, registration, promoting the brand and distributing to smaller stores, gyms and any other outlet within their country. Additionally, D2C has been growing quite rapidly, but it's not a key part of our business. It will be around 10% of income in FY '25. And as the brand awareness grows, we are finding that the D2C channel is also growing. A small part of our business is white label, which has been reducing in terms of share of income since '21. This is a strategic development as we do not look to promote white label. We only offer white label to key strategic partners. In terms of why we win and why we will continue to win, there's lots of ingredients to our success. There is no silver bullet. And we like this because it's more difficult to replicate these key ingredients that we have. One of the basic things is that the product tastes good, it looks good, feels good, and it's priced competitively. We do that very well. But in addition to that, in terms of NPD, nobody does it as well as Applied Nutrition. We do it faster, more frequent, better quality and more innovation than our competitors. And this is what we're told by a lot of our partners and consumers globally is that we are very different to our competition in that respect. We produce our own products at a high-quality BRC grade AA facility in Liverpool in the U.K. 85% of our sales are produced in-house. This enables us to produce things faster, quicker, higher quality. But also when you bring an NPD to the market, this enables us to do it much quicker. In terms of relationships, if you look globally at our partnerships, we have an unbelievable distribution network and some deep-footed relationships. Some of those partners actually invested at IPO. That's how much they believe in the brand. And then our people, key to our success. We have the right people. They are bought into what we're doing. They're on the journey with us. And these are the type of things that make us win and will ensure that we continue to win. Now I'm going to talk about the H1 performance. I'll cover off the strategic progress, and Joe will cover the financial performance. So in terms of our strategic priorities, which was to focus on existing customers and increase sales either to increase shelf space or increased distribution points for new customers, whether that be in new geographies or it could be an existing geography or a new channel and also D2C. Across all of those is NPD, which will play a part in increasing sales to all of those different strategic priorities. We have made significant progress, as I mentioned earlier. We've onboarded new customers such as Ocado, Central Co-Op and Vitamin Shoppe in the U.S., where we launched the AN performance range into 700 stores in the U.S. We've also had further penetration with existing customers. That includes listing new SKUs and also increasing our distribution points. Additionally, we've expanded our D2C offering. This has continued to grow organically despite it not being a key part of our business. As brand awareness has grown, we have seen the D2C side also growing. And we also launched several new products, which were great success, and I'll cover those a bit later in the presentation. And in terms of capacity to produce more products, we completed our factory extension in August 2024. And this extension will give us the capacity of around GBP 160 million in revenue. So in terms of new product development, this is a key part of our business and has continued to be in FY '25. We've had some great launches, in particular, the Coleen Rooney range. We launched with 5 different products. This was initially launched on our website on Amazon. We had huge success, and it also drove a lot of brand awareness. We've now listed these products in Holland & Barrett at 500 stores in the U.K. and Ireland, which was outside of your traditional range reviews, and this is how much of an impact that particular product line has had on our customers to enable us to list this with Holland & Barrett outside of the typical range review. Additionally, we've launched products like the Sparkling Protein Water. This has huge potential. We believe it could be a big mass market play, and we're having great success to date in terms of sales. We also launched the innovative CreaFlow, which was the first time anyone has been able to have a liquid creatine product. This has been, again, great in terms of brand awareness, but also in sales. And then other products like Creatine Gummies and Black Stak were launched among other products. Another product that we launched, which we're very excited about was the Vimto collaboration. This was in the Endurance range, and it was the isotonic energy gel and also the hydration tablets. The energy gel launched first and the data we have now in terms of this gel being the fastest growing and in terms of the highest growth gel on the market. That's despite being in much less distribution points than some of our competitors. So we see that the potential of this product is huge and will also be a USP for our Endurance range. We're now going to look at the market initiatives that happened during the period of H1. We launched our first ever TV campaign featuring Coleen Rooney, and this run in conjunction with the launch of her own range. We believe this helped contribute to a 60% increase in our social media followers, most of those being female, which was a strategic objective of ours during FY '25. Additionally, we onboarded Daniel Dubois, Heavyweight Champion as a new ambassador for the brand. We also launched 2 products in collaboration with Vimto. This was the isotonic energy gel and the hydration tablets, which have been a huge success to date. And we also attended 8 expos worldwide in H1. One of those was the Fit Expo in Colombia, which resulted in a large first order from the largest distributor in Latin America. I'll now pass you over to Joe, who's going to talk you through the numbers.

Thanks, Steve. I'm now going to cover the financial highlights for this half. I'm very pleased to be delivering a set of results that is at or above guidance. Revenue on a normalized basis grew 19%, and shortly, we'll discuss the detail of that. Gross profit and adjusted EBITDA margins remained strong during the period. Despite a small impact from the headwind from whey prices, the group's product mix is diverse, and therefore, there is no material impact on margin. Free cash flow was ahead of analyst guidance, and we continue to manage our working capital well. Our balance sheet and cash remain extremely positive and provides us significant flexibility and agility to manage the business. Our headline revenue is above the guidance that we set at the time of IPO. We wanted to be very clear with investors at the time of IPO about what they should expect for half 1, and we set that guidance at GBP 46 million worth of revenue for half 1. I'm pleased to say we delivered above that and delivered GBP 47.6 million of revenue in this half. When considering growth rate, it is important to take into account GBP 5.5 million of revenue that was accelerated from half 2 '24 to half 1 '24. As a result, on a normalized basis, our like-for-like revenue growth is 19%. The analyst expectation for this financial year is 16% revenue growth. As a result of our half 1 revenue, we remain extremely confident for the full year expectations of GBP 100 million of revenue. We'll now cover various segmentations of our revenue. Geographically, starting with the U.K., we saw strong revenue growth in the period of 34%, largely driven by our B2B retail channel. Europe also saw strong growth in the period of 39%. We continue to expand into new geographies. expanding current geographies, and BodyFuel continues to gain traction, both in France and new geographies. Internationally, the Middle East has declined year-on-year for a number of short-term reasons. Firstly, GBP 5.5 million of revenue was brought forward from half 2 FY '24 to half 1 FY '24. In addition, we exited a distributor relationship in November '24. This was a relatively new relationship that had delivered GBP 4 million of revenue in FY '24. We have discovered that this distributor had been making sales in the region to countries in which they were not permitted to. As a result, we made the decision to exit the agreement with the distributor, and this provided a headwind during this period. Finally, 2 geographies in the region required reregistration of products. While this is not unheard of, it is relatively unusual and affected all companies in the industry. For our business, the products are all now reregistered, and we were able to do this quickly, efficiently, and this shows the strength of our relationships with our distributors who have expertise in country and relationships with the regulatory authorities. The Middle East is still our largest overseas market, and we remain confident about the growth in the region. We see future growth in channel expansion in addition to new registrations in different geographies in the region. In terms of ranges, there is no significant difference from previously, and all of our ranges have seen significant growth in the period. D2C sales in the period amounted for 10% of revenue. and this represents 35% growth year-on-year. While the share of revenue from D2C increased during the period, we still remain a predominantly B2B business and believe this is the best model for future growth. We're now going to talk about whey prices and why our margins remain stable as a result of our diverse product mix. Only about 20% of our sales are for products where the predominant ingredient is whey protein, and therefore, our exposure is relatively small. We have a proven track record of delivering robust margins despite the changes in whey prices. On the right-hand side of this slide, we have indexed the price of whey protein at 0 based on the historical average seen since 2020. Since January 2023, the price of whey protein per kilogram has generally fluctuated between GBP 2 under this average and GBP 2.50 over this average. In half 1 '24, the price of whey protein had generally been at the bottom end of this range. And in H1 '25, the price has generally been at the top end of this range. Despite moving from the bottom end of the range to the top end of the range, this has had a relatively small impact on gross margins as a result of only 20% of our sales being for products where the predominant ingredient is whey protein. In January '25, we increased our prices for whey protein products to offset the continued elevated whey prices. We changed the prices of our products very infrequently. And generally, we are late, if not the last of the big brands to raise prices. Continuing on, you can now see an analysis of our historic and half 1 '25 gross profit. Historically, we've been successful in growing our sales in non- whey products. This is as a result of our move to expand our product offering and introduce more products in areas like grab-and-go and health and well-being. As a result, our share of revenue from whey products has reduced from 29% in financial year '20 to 20% in half 1 financial year '25. As a result of this, in addition, we have gained efficiencies in our production process. And as a result, historically, our gross profit margin has improved through FY '22, FY '23 and FY '24. Half 1 '24 saw unusually high gross margin as a result of the low whey protein prices we have discussed in addition to low prices from shipping goods from China to the U.K. Despite both of these having reversed in half 1 '25, our gross profit margin remains only 1 percentage point different to FY '24 as a whole and both FY '23 and FY '22. In April '24, we increased wages for staff who are costed within cost of goods sold at a high single-digit percentage. Despite this, as a result of our increased factory efficiency and the benefit of the high output lines we installed as part of our extension in calendar Q3 of 2024. As a result, there has only been a very small impact on our gross margin from these staff costs. I'm now going to discuss administration costs and EBITDA margin. Financial year '24 half 1 administrative spend was significantly affected by the brought forward revenue when we consider it on a percentage of revenue basis. In half 2 '24, we saw the reverse of this, and we additionally invested in the business as we prepared for life as a plc. Therefore, individually, half year metrics for FY '24 are not representative of long-term expectations. Overhead spend is well controlled. And when we consider it as a percentage of revenue, FY '25 half 1 is in line with FY '24 as a whole. This is what we guided to at the time of IPO. Despite some headwinds in the period, as we've outlined, we've remained agile as a business, delivered margins in line with expectations and remain confident in delivering margins in line with expectations for the full year. We're now going to discuss our cash flow, which was ahead of analyst expectations. The dividend in the period was the pre-IPO dividend, which was declared in the prospectus. Other cash flow movements are as expected. We believe CapEx in the period will still be approximately GBP 1 million as outlined at the time of IPO, but will be slightly weighted towards the back end of the financial year. The strong cash balance allows us to invest in the business, drive margins and also allows us to remain extremely agile. Capital allocation remains unchanged as we continue to drive for margins, cash flow generation and profitability. I'll now pass over to Tom, who will cover the outlook.

Thanks, Joe. Now to the outlook. As you will have seen from the announcement in March, we recently signed a joint business plan with Holland & Barrett, one of our biggest customers. This joint business plan will see us list more products within the Holland & Barrett stores, get deeper distribution with existing products and also give Holland & Barrett early access to our new product development. We're really excited by this joint business plan because this has the potential to significantly increase our revenue from one of our largest customers. At the same time, we announced 3 new listings within the U.S., starting with GNC, one of the biggest specialty retailers nationwide; Hy-vee, one of the biggest grocery chains in the Midwest; and H-E-B, one of the biggest grocery chains in Texas. These 3 new customers accumulate over 1,000 stores nationwide within the U.S. Combined, these new agreements underpin more than 50% of the revenue growth expected for FY '26. As previously mentioned, H2 has started really well with March delivering our best ever month. This further underpins the group's full year revenue guidance of GBP 100 million. Profitability and cash flow are expected to be in line with market expectations. As Joe has talked through, we do not expect the whey prices to materially impact our full year's gross margin. Building on the back of half 1, we're going to continue to do what we do best, expand our presence with existing customers, existing geographies and channels whilst expanding into new geographies, new channels and new customers, whilst also delivering market-leading new product development. To finish off, as the market continues to grow, we are well positioned to deliver sustained growth, and we've not even scratched the surface yet. Thank you, everybody, for listening, and we're now ready to take questions.

Our first question is, are there any specific new markets you are targeting for 2025?

Market that we have current registration within. There's markets -- existing markets that we have more products being registered in. But there's no new territories that we're actually going after right now. We believe that we're trying to deepen penetration in existing markets and markets that we've been registered in the last 12 months that are about to come to fruition.

It is worth noting that we've currently got a relatively new customer in Latin America and the Caribbean. Their order is on the water for them now. So they will -- they're not necessarily new territories we're targeting as we've already targeted them and had a successful order, but products will be getting launched in those territories during this half.

The next question is, with an increasing number of sports nutrition brands entering the market, how are you maintaining brand differentiation?

I think from a number of aspects, all of our products are designed, formulated and manufactured in-house, which is a bit of a differentiator to a lot of our peers. Our products are always market-leading formulas. They always look great, taste great, feel great and very competitively priced. I think we understand compliance inside out. I feel like we've got our ear to the ground. I feel like we understand the industry, how the industry is evolving. I feel like we -- nobody else does NPD, new product development like us. I think for all of those reasons, that's why we are -- and the fact that we're constantly keeping the brand fresh and relevant. I think they are all the reasons why we're winning against our peers.

The next question is, what are the biggest challenges and opportunities you foresee in the coming months?

The challenges -- the day-to-day challenges of any brand that we deal with. I think opportunities, I think the biggest opportunity we have right now is the U.S. given that 50% of global spend is in the U.S. I think -- but also we have huge opportunities here in the U.K. with grocers like Tesco, Asda and other grocers that we're not even listed in yet. The new strategic partnership that we've just signed with Holland & Barret is going to see us triple our revenue and increase our shelf space across all categories, not only in sports, but also in vitality in the chillers, in the food, in health and wellness, in beauty. I think these are the more short-term opportunities that we have.

The next question is, can we expect to see any shareholder returns in the form of dividends or share buybacks in the near future?

Officially, our policy on capital allocation hasn't changed. Having said that, we are obviously a very cash-generative business. We'll reconsider after the end of the year exactly where we are in terms of cash. And obviously, in the future, if we don't have a use of cash we have on the balance sheet, we will return it to shareholders, whether that's via a dividend or a share buyback will likely depend on the market dynamics at the time.

Thank you. The next question is, have there been any recent supply chain disruptions? And how have you managed to mitigate these issues?

I mean the only supply chain disruptions we had was the Red Sea crisis at the time. Customers were placing orders and obviously, the containers were being diver that caused some supply chain disruption. But apart from that, the supply chain is solid at the moment, no issues.

The next one is what factors contributed to exceeding expectations post IPO?

I think just doing what we do and doing it really well, doing everything we said we're going to do and just do better than we anticipated. And that includes entering new geographies, entering new channels, expanding our presence in existing channels and focusing on, from a U.K. perspective, on grocer where we're growing out our presence. But yes, just doing everything good that we said we're going to do.

The next question is on the U.K. and Europe. Revenues saw strong growth. Is this sustainable?

Absolutely. Listen, yes, we've seen good revenue increases in the U.K. and Europe. I think it's 34% and 39%, I think it might have been. But let me just say we've not scrapped the service. We've got so much more growth to go after in U.K. and Europe across all channels, not just specialty where we're quite evolved. We've got low growth there, but you look at other channels like convenience, grocer, discounters, we've got so much more to go.

The next question is, what do you import from China?

So we import some ingredients from China like performance ingredients like beta-alanine, creatine, amino acids and vitamin powders and also some of our packaging.

The next question is, you say you will not be impacted by U.S. tariffs. But how much will it cost to shift production of liquid products currently produced in the U.K. to the U.S.?

In terms of shifting production of liquid products, they are currently outsourced for us in the U.K. as are all of our liquid products. So we expect, and this is borne out by discussions we're already having that they will be price neutral to move it to the U.S.

The next question is, you have a growth plan with a full price high street retailer. For this, do you have to offer different products to those supplied to some of the discounters?

Yes. We're trying not to put any of the Applied Nutrition core range into discounters, particularly not any [indiscernible] products. That's why we developed the BodyFuel range where we see the discounters are a key player in sports nutrition, health and wellness. We wanted to have a share of that channel. So we developed the BodyFuel range to appeal to that consumer and enable us to have products on shelf in discounters.

The next question is, what else can you tell us about how you are growing the direct-to-consumer channel?

On the direct-to-consumer channel, it's not a key focus for us because we are a B2B business. But as brand awareness keeps growing, we are finding that the D2C channels are also growing. On the website, in particular, we never compete with our customers on price, but we do offer things like bundle deals. We've developed an app for customers to use. So price-wise, it's -- we're not aggressive, but some consumers like to come direct to consumer -- direct to the brand for the products. We will give free samples, which customers appreciate. So yes, it is still growing really nicely, but it's not a key focus for us.

The next question is, can you provide some color on operational changes or efficiencies being introduced to help support margin recovery?

Yes. Before IPO, we invested in a factory extension, which gave us the ability to go to around GBP 160 million of revenue. That was with 2 new powder lines. The way those lines are set up, they're called high output lines. They're basically the equivalent of 1 line in the extension is the equivalent of 2 lines in the existing factory, which has helped drive down the cost of production. We do have some further automation that we can install into the factory such as an automatic bagging line. We're also looking to invest in a new capsule machine, which will give us higher output. So there's still room for improvement in terms of factory efficiency, but we are running quite efficient in the factory [indiscernible].

Sorry, Steve, I think just to add to that, the question mentioned margin recovery. It is just worth noting our gross margin for this half is above where it was in FY '22, above where it was in FY '23 and only marginally below where it was in FY '24 as a whole. And our EBITDA margin is actually in line -- when you take into account a small amount of PLC costs, it's actually in line with what we've done historically. And that is with the small headwinds that we've discussed in the period.

[Operator Instructions] We have another question that is, what are the key nutritional trends as you see them?

Nutritional trends vary from consumer. So we're seeing collagen as a trend that's been holding up for a couple of years now. It's fair to say collagen started as a trend and now is very much stable product, but it still is transit. Mushroom powders are still trending. But like I said, if you look across the whole of health and wellness, you'll have trend of products within sports nutrition, trend of products within Vitality, trend in products within [indiscernible] and the same within health and wellness.

So there are no further questions at this time. So I would like to hand over to Thomas to close the call, please.

I'd just like to say thank you for joining us on the call, guys, and thank you for your interest. And yes, thank you so much.